Absolute return investments still carry a level of stigma, with many investors feeling compelled to preface the concept with “so-called”.
I’m not sure such derision is fair these days and, contrary to much of the early-stage criticism, by and large most of these funds have actually been working as intended.
Absolute return strategies (they are technically strategies, after all, as opposed to an asset class) have been around for decades, although for much of this time they have been in the guise of hedge funds. As well as having a poor reputation, for many years these funds were not widely available and had eye-watering charges.
Fortunately, the industry has moved on since then and investors now have ready access to a wide range of retail-friendly absolute return funds. These don’t generally carry the exceptionally high levels of gearing which tended to make hedge funds so dangerous, and have much more reasonable charging structures, which are broadly in line with more traditional long-only, single-asset-class funds.
Another common complaint centred on the lack of an actual absolute return in some funds. While this only concerned a few funds with limited track records, for some it has been enough to tarnish the reputation of the sector for many subsequent years.
Investors were particularly sensitive in the period straight after the global financial crisis, when most of these funds were launched in response to demand from investors who, it’s fair to say, had been shaken by the heavy slumps when many portfolios suffered, making them more sensitive than usual to subsequent losses.
We are now a number of years on, the absolute return sector has had time to mature, and we are able to get a better understanding of its profile.
Take a look at the IA Targeted Absolute Return sector. Of the 74 funds with data available, 91 per cent have generated a positive return since launch, although the length of track record for each of these will vary.
Looking back over the past three years, 85 per cent of the funds I looked at have generated a positive return over that period. Many readers will be familiar with the ‘Spot the Dog’ methodology we use biannually for equity funds – applying a slightly adjusted methodology to the Targeted Absolute Return sector, none of the funds there would be considered a ‘Dog’.
I don’t mean to suggest that most absolute return funds have had great performance – of the 85 per cent with a positive performance, only 58 per cent gave a return in excess of UK RPI inflation – and, as always, detailed due diligence is needed to identify high-quality funds in the sector.
What I am suggesting is the sector has come of age, and in aggregate is doing what it is intended to do – providing a positive return with low correlation to the traditional equity and bond asset classes.
Increasingly, there are signs of stress in equity and bond markets, and many are expecting the summer to see a pick-up in volatility, which could spur further interest in alternative areas of investment.
With a number of high-quality and proven funds in the absolute return sector, I think it is important we move past any outdated ideas that may still linger, and give serious consideration to a category of funds that – when used appropriately – have an established ability to materially benefit portfolios.
Ben Seager-Scott is director of investment strategy at Tilney Bestinvest
